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On Dec 19, we upgraded the leading teen apparel retailer, American Eagle Outfitters, Inc. (AEO - Analyst Report) to Neutral with a target price of $15.00.

Why the Upgrade?

American Eagle is one of the major specialty retailers of fashionable and stylish apparels and accessories in the United States and Canada. The company has a strong portfolio of well-established brands, each of which is focused on the unique characteristics and rapidly changing preferences of the target customers.

We are impressed by American Eagle’s AE’s rewards program, strategic store expansion, and emphasis on inventory control that position the company for future growth. Further, we see continued momentum in the Denim category along with improved merchandise assortments in the women’s business segment, which will likely augment its top-line performance.

Moreover, we believe that the company’s cost-saving initiatives and long-term growth strategy will not only provide financial flexibility but help drive value proposition as well.

However, we are not completely optimistic about the stock due to  disappointing third-quarter fiscal 2013 results due to soft sales and lower merchandise margins. Sales during the quarter declined 5.8%.

The dismal results in the recent quarter resulted in a conservative outlook for the fourth quarter. This triggered a downward movement in the Zacks Consensus Estimate. For fiscal 2013 and 2014, the Zacks Consensus Estimate earnings per share moved down by 11.8% to 75 cents and 13.2% to 92 cents per share in the last 30 days, respectively.

Moreover, the apparel retail industry is a consumer-driven industry and hence is very sensitive to the health of economy. We remain skeptical regarding the company’s future performance given the current macroeconomic challenges such as high household debt and unemployment levels, which may restrain consumers’ spending power and in turn affect the company’s top and bottom lines.

Other Stocks Worth Considering

American Eagle currently holds a Zacks Rank #3 (Hold). Other stocks worth considering in the apparel retail industry include Conns Inc. (CONN - Snapshot Report), Hanesbrands Inc. (HBI - Analyst Report)) and G-III Apparel Group Inc. (GIII - Snapshot Report), all of which carry a Zacks Rank #1 (Strong Buy).

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